Monday, February 22, 2010

The Dark Side of Maryland's Fiscal Picture

Len Lazarick has an excellent piece today on the site concerning what he calls the "darker underside" of Maryland's credit rating. The darker underside refers to the "continuing budget deficits in coming years and the mounting deficit in state pensions and retiree health benefits." According to Lazarick, Maryland's unfunded pension and health benefit liabilities for retired state employees now exceed $32 billion – and they have been growing fast. Absent action, these unfunded liabilities will continue to drive the state's structural deficit for many years to come.

In a Perspectives paper that Len wrote last April when he was a Visiting Senior Fellow at the Free State Foundation, he discussed the impact of the state employee pension and health benefits on the state's budget deficit. The paper, "Curing Maryland's Structural Deficits: A Call for Mandate Reform," is here. Read the paper to get a more complete picture of the pension and health benefits situation. Along with other mandates contributing to the state's structural budget deficit. In the meantime here are a few excerpts:

"Teacher and public employee unions argue that defined-benefit pensions attract teachers and state workers to their jobs and help retain some of them, but they have become increasingly rare in the private sector. Maryland pensions are available to anyone with 30 years' service, regardless of age."

"A DLS study for the OPEB [Other Post-Employment Benefits] commission compared Maryland’s health insurance benefits with those of nine other states that also hold AAA bond ratings. 'Maryland offers among the most generous package of health benefits to its retirees compared to the benefits offered' by the other states, DLS found. 'Maryland offers the shortest vesting period, the lowest prescription drug copayments, the second most plan options, and the second highest premium subsidy. As a result, Maryland has the highest retiree health liability per covered retiree and spouse among these 10 states.' The commission also heard from a consultant comparing retirement benefits in large private sector companies. Only about a third now offer health benefits, compared to 90% of state governments, and half of the private sector employers cap their share of the cost of these benefits. Clearly, the liabilities of health insurance benefits for Maryland retirees is another unfunded entitlement that helps drive the state’s structural deficit in the general fund – especially if they were being advanced funded, as GASB [Governmental Accounting Standards Board] requires."

Both Democrats and Republicans share the blame for not addressing the situation while the unfunded retiree pension and health benefits liabilities continue to grow, even as the deficit grows. Both have found it easier to curry favor with the state employees than to discuss ways of curtailing future liabilities.

Conventional wisdom has long dictated that turning a blind eye was the politically safe course. Perhaps such "blind-eye" governing has worked for Maryland's politicians for a long time. But if Maryland's governor and legislators continue on what in the past was considered the politically safe, even if fiscally irresponsible, course, they may be surprised to find out that Maryland's voters – like those in Massachusetts -- are not immune from the concern about deficits and government overspending that is sweeping the country.

Maybe, to rework a thought form James Carville, Marylanders will come to understand: "It's about our children and grandchildren, stupid!